Trade to Upgrade

cars.com On the Road Weekly Publication

With trade-in values peaking, now may be the time to trade up to a new model.

By Jim Gorzelany

CTW Features

A severely depleted inventory of used vehicles is boosting the values of late-model cars to record highs these days. While this means sky-high prices for those looking to purchase a used vehicle, it’s a bonanza for owners of late-model cars looking to upgrade their rides.

That’s because trade-in values are concurrently generous in the process. Getting more in trade for your existing car means you’ll have additional cash to use as a down payment on a new model. With interest rates at all-time lows, some owners may actually be able to reduce their monthly car payments by trading in their existing vehicles for brand-new ones.

The run-up in trade-in/used car values could likewise be beneficial for consumers having a car coming off-lease in the coming months. Lessees can typically buy a car at the end of the contract term at a preset residual value. If that amount winds up being lower than the car’s current trade-in value, it would be possible to buy the car and immediately re-sell it – perhaps even back to the original dealer – at a profit. At the least it would mean buying a good-condition used car at below-market value.

"The slowing rate of depreciation on used vehicles over the course of the year will lead to even stronger trade-in values and enhance the equity that a consumer has in their vehicle," says Jonathan Banks, executive automotive analyst with the National Automobile Dealers Association.

While exact figures weren’t available, Alec Gutierrez, manager of vehicle valuation for Kelley Blue Book, suggests the nation’s used-car inventory may have contracted by nearly 25 percent since 2009. This is attributed to depressed new-car sales and a rollback in leasing that followed the economic collapse in late 2008, along with automakers cutting sales to rental-car fleets, all of which diminished the number of used models returning to dealers’ lots. In addition, 677,000 used cars – albeit older and less-desirable models – were taken out of the market by the “cash for clunkers” program in 2009.

Dealers are willing – and eager – to pay whatever it takes to replenish their stock of late-model used cars because they’re historically a more reliable source of profits than new models, according to the NADA.

In strict accordance with the laws of and demand, this has enabled the average value of a one- to three-year-old vehicle to skyrocket from $15,000 in 2008 to more than $23,000 in 2011, according to data compiled by Kelley Blue Book. That’s an increase of nearly 16 percent per year for what is otherwise a depreciating asset. Used-car values are expected to remain high at least throughout 2012 and perhaps well into 2013 until supply eventually catches up with demand.

It’s certainly worth your time to check the current trade-in value of your car via one of the Internet’s valuation sites, like NADA Guides or Kelley Blue Book, and consider whether it’s opportunistic to cash in on the equity.

Top Trade-Ins

We consulted NADA Guides to determine the current trade-in values of model-year 2008 cars and trucks in “clean” condition (meaning no mechanical defects, only minor wear and tear and a clear title) with 46,500 miles on the odometer and compared them against their original retail prices. The result was the following list of three-year-old used cars that can be expected to deliver the greatest return, percentage-wise, as trade-ins.